Eurozone Debt Crisis – RantAWeek
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Eurozone Debt Crisis

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Posted by Tyler Miksanek on April 18, 2012 at 5:00 am

The Eurozone is experiencing financial difficulties once again, and this time problems appear to be spreading beyond chronically debt stricken Greece.  Other, much larger economies, are now in danger of dragging down Europe’s economic system.  While Greece still tops the list of nations that Europe’s leaders are worrying about, similar debt fears are beginning to manifest themselves in other Euro countries.

If Greece remains the number one concern, then Spain must be a close second.   Even though Greece presents a more immediate threat to the stability of the Euro, possible economic instability from Spain could have more drastic consequences than a Greek collapse.  This is because Spain’s economy (measured by GDP) is nearly five times as large as Greece’s economy*.  Potential economic fallout from a Spanish collapse can therefore be estimated to be nearly five times more dangerous than repercussions from Greece.

Unfortunately, Spain’s economic situation is becoming increasingly more dire.  Investors are growing wary of the nation’s debt, and ten year bond yields have been hovering around the uncomfortably high six percent mark.

If six percent seems relatively low, think about it this way.  The average mortgage rate in America is well below 6%, meaning investors have less confidence in Spain’s financial future than American banks have in the average American home buyer.  A country should be more economically stable than an average middle-class family, but in investors’ eyes, that may no longer be the case for Spain.

Spain is affected by underlying economic problems, not just a lack of trust from creditors.  While Americans have been complaining about an unemployment rate around 8%, the Spanish are experiencing unemployment rates approximately three times as high!  Worse, the Spanish economy is shrinking, complicating plans to lift the debt-ridden nation out of its financial woes.

But Spain isn’t the Eurozone’s only worry.  Italy’s finances also give member nations cause for concern.  Much like Spain, Italy is deep in debt and their bond rates have been spiking.  Even larger than Spain’s economy, any attempt to bailout Italy would be a huge sacrifice for the European economy as well.

Together, Spain and Italy pose a double threat.  If one’s economy collapses, debt contagion may cause the other’s economy to falter as well.  To protect themselves from this worse-case scenario, the region has been creating new lending institutions.  Both the EFSM (European Financial Stability Mechanism) and the EFSF (European Financial Stability Facility) have been set up to help troubled countries, and they will likely join to form one institution next year.  Whether or not the combined resources of these funds will be enough to successfully combat problems in Spain and Italy is unknown, but this move towards consolidation is certainly making the system stronger.

Consolidation itself seems to be a theme in Europe.  The seventeen nations that make up the Eurozone have been forced to work together while dealing with this mutual threat.  Weaker economies have needed support from larger, stronger economies in order to stay afloat.

As large economies go, the German economy is the powerhouse of the Eurozone.  Having invested heavily in the debt of their Euro brethren and not wanting trade to dry up, the Germans have taken a leadership role in combating the crisis.  But interestingly enough, trouble in the rest of the Eurozone is turning Germany into an investment safe-haven.  Even as bond rates have spiked across Europe, the cost of borrowing for Germany has actually been decreasing.  Germany has also experienced a significant drop in unemployment over the last few years.  And yet even Germany would be severely affected by a complete Eurozone collapse, so it is for this reason that German leaders are working diligently to solve debt-related problems.

The Eurozone faces difficult and dangerous economic issues, but the member nations have proven that they are willing to collaborate.  Since the possible economic consequences are dire, let’s hope they are successful.

 

* World Bank data (2010) – http://data.worldbank.org/indicator/NY.GDP.MKTP.CD

 

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